The Power of Integrative Thinking

Roger Martin, Dean of University of Toronto's business school, has a wonderful article in the June issue of Harvard Business Review. He argues that successful leaders are integrative thinkers. By that, he means that they attack problems in the following manner:

• They examine problems as a whole, with careful consideration of how different parts of a situation fit together, rather than analyzing different elements in isolation.
• They consider multiple avenues of causation for a problem, as well as possible nonlinear relationships between cause and effect, rather than thinking of terms of simple linear relationships between a single cause and effect.
• They embrace the tension between opposing ideas, and they use that conflict to generate creative new alternatives, rather than making simple either-or decisions.

In short, Martin argues that successful leaders think holistically and embrace the power of conflict. In my work, I have argued that constructive conflict within a management team leads to better decisions. Martin stresses that successful leaders also have to embrace conflict within their own mind. They must "hold two conflict ideas in constructive, amost dialectic tension." Martin points out that many people find this internal tension uncomfortable, and thus they shy away from it.

While I would agree with Martin in general, I am reminded of the challenges associated with this type of integrative thinking, as described by Karl Weick in a famous 1984 article entitled "Small Wins." Weick argued that large, complex problems can sometimes be cognitively overwhelming. Thus, he argued that decision-makers should break complex problems into parts, and seek a series of "small wins" as a means of generating solutions to complicated issues. Martin explicitly argues against breaking problems into pieces. He says that holistic thinkers view problems as a whole. Here, I disagree slightly with Martin. I think one can approach a problem holistically, yet still follow Weick's advice to seek small wins while working through the organizational decision-making process required to solve the problem. Trying to achieve small wins in attacking a problem does not mean that a leader fails to think about how various elements of a problem fit together.

Supermarkets vs. Wal-Mart

Today's Wall Street Journal has an interesting article about how many supermarkets have learned to compete more effectively with Wal-Mart. The answer is straightforward: don't try to imitate Wal-Mart's low cost strategy. Instead, supermarkets have tried to create some differentiation by offering unique upscale products and high quality prepared meals along with the usual staples. They also have redesigned their stores to create an enhanced shopping experience for the consumer. Not all supermarkets took this path. Some tried to imitate Wal-Mart's low costs and low prices, and many of them found their way to bankruptcy.

The competitive dynamics in the supermarket industry remind me of what took place in the mass merchandising sector. Many chains went bankrupt trying to match Wal-Mart's low costs and low prices. Target took a different path. It chose a differentiation strategy, with higher quality products, better service, and a bright, clean store with easy-to-navigate aisles in which consumers love to shop. It didn't go head-to-head with the behemoth. Instead, it chose a form of indirect competition, moving slightly upmarket. In so doing, Target has prospered while many chains became extinct.

Firms in all industries would be well-served to consider the fate of those that have competed with Wal-Mart. Imitating the market leader often does not lead to bountiful profits. Finding a different path proves much more economically rewarding.

Supply Chain Risk

CNN reports today on a study by Deloitte Consulting regarding supply chain risk. The title of the Deloitte report is "Supply chain's last straw: A vicious cycle of risk." The consulting firm studied how many firms have prepared (or not prepared) for major supply chain disruptions. They concluded that, "The search for cheaper labor, cheaper raw materials, and cheaper transportation - the quest for efficiency - has forced the focus of companies to switch from revenue growth to cost reduction...Individually, these forces have changed the world in which we live and conduct business. But when combined, these forces can create a perfect storm of risk not seen before in the history of commerce or humankind."

Charles Perrow's theory of complex systems, I believe, can be applied to think about the enhanced risk that firms are assuming with the leaner, more efficient global supply chains of today. According to Perrow, the risk of catastrophic incidents increases when systems are characterized by what he calls "tight coupling." By tight coupling, he means systems that have the following characteristics: time dependent processes, a fairly rigid sequence of activities, one dominant path to achieving the goal, and very little slack. His classic example is that of a nuclear power plant. Its subsystems are tightly coupled (or highly rigid, if you will). One could argue that the efforts to build leaner, more efficient global supply chains have enhanced the level of tight coupling in those systems, and thereby enhanced the risk of a catastrophic failure of some kind.

Take, for example, the issue of slack. Years ago, supply chains tended to have a fair amount of slack - for instance, many firms maintained a fair amount of buffer inventory between various stages of the value chain. Of course, carrying all that inventory proved quite costly. Today, firms have been driving slack out of their supply chains in order to reduce costs. The unfortunate downside of that slack reduction may be an increase in tight coupling - and thus, in systemic risk. Naturally, the solution to the enhanced risk does not lie in adding back tons of waste to the supply chain. Instead, firms must find ways to reduce the rigidity of the system, so that one small error cannot easily cascade into a series of problems that lead to major catastrophe.

Does Six Sigma Inhibit Breakthrough Innovation?

Business Week has a thought-provoking article about the tension between innovation and efficiency at 3M. When Jim McNerney came over to 3M from General Electric, he brought with him many GE processes and systems, including Six Sigma. During McNerney's tenure at 3M, profitability soared. Operating margins increased from 17% to 23%, and earnings grew 22% per year on average. However, some people wonder whether the Six Sigma process, as well as the emphasis on improving efficiency, harmed the creative culture at 3M and dampened the likelihood of breakthrough innovation. Drawing on 3M's experiences as well as the work of several academics, the article suggests that Six Sigma may drive a large amount of incremental improvement and innovation, but perhaps makes it difficult for employees to pursue discontinuous/disruptive innnovations. Simply put, one cannot completely systemize the process of innovation.

It will be interesting to watch how new CEO George Buckley's efforts to stimulate creativity play out in the years ahead. Can the company stimulate more breakthrough innovation without compromising its efforts to continuously improve quality and efficiency? The 3M story takes us back to a very interesting issue that academics have been studying for years, namely the tension between exploitation activities and exploration activities. Exploitation refers to the systematic refinement and improvement of existing processes and products, while exploration involves more open-ended experimentation and discovery. Can firms simultaneously perform both sets of activities well? Often, a firm's resource allocation process exhibits a strong bias toward one form of activity or the other. Senior management teams often have skills and capabilities that are well-suited for exploitation, but not exploration, or vice versa. The incentive system also often leans one way or the other. Some managers and academics believe that the best firms can strike a balance between exploration and exploitation, but it has not been easy identifying how to achieve this balancing act. It strikes me that we will learn a great deal about this issue by watching how events unfold at 3M in the years ahead.

Predicting Hit Products

Seth Godin has an interesting new post on his blog entitled "Pundits are (nearly) always wrong." He examines why many so-called experts are wrong in predicting the next big hit in technology, books, music, etc. Godin argues that the experts often "measure the wrong thing." They focus on the presentation more so than the substance of the idea. To some extent, a slick and clever pitch can overcome many flaws of logic.

Moreover, Godin suggests that experts often judge a pitch based on their existing worldview. Their mental model becomes the filter through which they judge whether something will become a hit. Of course, that mental model is largely shaped by past successes and failures. However, as Godin rightly points out, "The problem is that hits change worldviews. Hits change our senses. Hits appeal to people other than the gatekeepers and then the word spreads."

Godin's argument reminds me of the famous quote by legendary screenwriter William Goldman, who once remarked that “nobody knows nothing” in Hollywood, meaning that picking hits remained a formidable challenge even for industry veterans like him.

The Eclipse of the Public Corporation

Nearly two decades ago, Michael Jensen was criticized by many people, including many of his academic colleagues, for his thought-provoking article, The Eclipse of the Public Corporation, published in Harvard Business Review. People dismissed him when the LBO boom of the 1980s faded. They laughed when he wrote, "By the turn of the century, the primacy of public stock ownership in the United States may have all but disappeared." Well, in January 2000, with the dot com bubble raging, Jensen's far-reaching prognostications did seem completely off base. What about today? The dramatic expansion of private equity has validated Jensen's predictions from 18 years ago. Private equity has expanded rapidly, in part because it does solve some of the governance problems posed by the large publicly traded corporation, with its separation of ownership and control.

It's worth revisiting Jensen's arguments for a moment. At the time, Jensen argued that the public corporation's "decline is real, enduring, and highly productive." He explained the benefits of private equity and leveraged buyouts using agency theory, of which he was one of the founding fathers. Jensen wrote, "By solving the central weakness of the public corporation - the conflict between owners and managers over the control and use of corporate resources - these new organizations are making remarkable gains in operating efficiency, employee productivity, and shareholder value."

I can recall being one of Michael Jensen's students back in the early 1990s, long before I became his colleague on the HBS faculty. His class was the most popular elective at HBS back then. Not everyone agreed with him, but he offered thought-provoking theories, and he sparked some wonderful debates. This article, in particular, resonated with me and many of my peers back then, and it sure does seem quite prescient looking back today.

Back to Retail for Dell

Dell announced today that they will be selling several PC models in Wal-Mart stores. It's a very interesting development, not only because Dell is so well-known for its direct business model, but also because Dell did not succeed when it tried to sell PCs in the retail channel back in the early 1990s. What's the challenge for Dell as it tries to sell through retailers? It goes back to why many traditional PC makers had difficulty imitating Dell's direct business model. The two ways of doing business (selling through retail and selling direct) are somewhat incompatible with one another. Selling through retailers means producing and distributing large volumes of standardized products. Selling direct means producing customized PCs on demand. The processes and activities required for each business model are quite different. It's easier for a firm to completely optimize on one business model, rather than trying to operate two models simultaneously in the same corporation. That's one reason why Dell did so well in the 1990s, while IBM, Compaq, and others struggled to launch their direct businesses while still selling through value-added resellers and retailers. Dell was a "pure play" - those often trump firms that find themselves "straddling" between two somewhat incompatible business models. Hewlett-Packard ultimately figured out how to make the two models work together - now Dell must learn the same if they wish to succeed in the retail channel.

Sir James Dyson on Failure

Very interesting to read the current issue of Fast Company, given my recent post regarding managerial attitudes toward failure. Writer Chuck Salter interviews Sir James Dyson, the inventor of the best-selling vacuum cleaner in the U.S. - the famous Dyson bagless vacuum. Dyson points out that he made more than 5,000 prototypes before he discovered the model that became a commercial success. He notes, "There were 5, 126 failures, but I learned from each one. So I don't mind failure. I've always thought htat schoolchildren should be marked by the number of failures they've had. The child who tries strange things and experiences lots of failures to get there is probably more creative. " Of course, that sentence struck me because I had just written about Build-A-Bear CEO Maxine Clark's admiration for her schoolteacher who did precisely what Dyson suggests! Dyson goes on to say: "We're taught to do things the right way. But if you want to discover something that other people haven't, you need to do things the wrong way. Initiate a failure by doing something that's very silly, unthinkable, naughty, dangerous. Watching why that fails can take you on a completely different path."

Tuition Assistance and Employee Retention

Today's Wall Street Journal reports on research by Stanford graduate student Colleen Flaherty and Wharton professor Peter Cappelli indicating that employees are less likely to leave a firm if they have been enrolled in a tuition assistance program. The finding proves quite interesting, because many firms have worried in the past that employees would jump ship after taking advantage of a tuition assistance program. Economists too have questioned whether tuition reimbursement programs increase turnover among talented employees. After all, most MBA programs enhance an employees' general human capital, rather than firm-specific human capital; thus, they become more attractive to outside employers. Investments in firm-specific human capital, in contrast, would increase an employees' prospects within the firm, but not on the outside market. The findings from Flahery and Cappelli suggest that employees may stick around despite the increase in marketable skills. Perhaps employees feel a sense of loyalty to their employers, or they might find that the advanced degree offers numerous opportunities for internal promotion. Of course, the finding may also suggest that the kinds of firms offering generous tuition reimbursement programs also are quite likely to have other attributes that are highly attractive to talented, highly educated employees. Those other attributes may explain, in part, why turnover is lower for those enrolled in tuition reimbursement programs.

Attitudes about Failure

Tom Kelley, the co-founder of IDEO - one of the world's leading design firms, has a great saying about how to learn and innovate effectively: "Fail early and often to succeed sooner." At IDEO, a great deal of experimentation and prototyping occurs in the design process. People try lots of new things in search of progress toward a great design. Unfortunately, most organizations have the wrong attitude toward failure. They treat all failures in the same manner -harshly. Managers often create environments where people live in fear of making the smallest of mistakes, and thus, employees become highly risk averse. Yet, without risk-taking, innovation will not take place.

Maxine Clark, founder and CEO of Build-a-Bear Workshop, has a refreshing take on how to encourage risk-taking and use mistakes to drive innovation. She has built an incredibly successful company, growing it to over $350 milllion in sales over the past decade. She has done so by delivering a world-class customer experience in her stores. In her book, Clark tells us the story of her first grade teacher, Mrs. Grace. Like many elementary school teachers, Mrs. Grace graded papers using a red pencil. However, unlike most of her colleagues, Mrs. Grace gave out a rather unorthodox award at the end of each week. She awarded a red pencil prize to the student who had made the most mistakes! Why? Mrs. Grace wanted her students engaged in the class discussion, trying to answer every question - no matter how challenging. As Clark writes, "She didn't want the fear of being wrong to keep us from taking chances. Her only rule was that we couldn't be rewarded for making the same mistake twice." That is the key - making sure that you emphasize the importance of learning from each mistake, so that they do not happen again.

Clark has applied her first grade teacher's approach at Build-a-Bear by creating a Red Pencil Award. She gives this prize to people who have made a mistake, but who have discovered a better way of doing business as a result of reflecting upon and learning from that mistake. Clark has it right when she says that managers should encourage their people to "experiment freely, and view every so-called mistake as one step closer to getting things just right." Of course, her first grade teacher had it right as well when she stressed that people would be held accountable if they made the same mistake repeatedly. Failing to learn is the bad behavior that managers should deem unacceptable.

Chrysler Sold to Cerberus

DaimlerChrysler announced today that they would sell 80% of Chrysler to a private equity firm (Cerberus Capital Management) for $7.4 billion. Of course, Daimler bought Chrysler back in 1998 for $36 billion. Is it any wonder that Newsweek once called the merger, "the worst-executed big takeover since God invented corporations." If you want to learn more about how this merger took place back in the late 1990s, I would highly recommend reading Taken for a Ride: How Daimler Drove Off with Chrysler. Veteran auto industry journalists Bill Vlasic and Brad Stertz wrote this definitive account of how the deal unfolded. I had the pleasure of hosting the two gentlemen at a seminar at Harvard Business School several years ago. They impressed us with the thoroughness of their research, and the incredible access that they had secured with many of the key figures involved in the deal.

Breaking up General Electric?

The Wall Street Journal has an article today about the calls by some investors to break up GE. Some shareholders have clamored for a break-up, largely because GE shares have performed poorly since Immelt became CEO in 2001. The article points out that GE shares are down 7% since Immelt took charge, while the DJIA is up 35%. This discussion reminds us of the arguments surrounding the conglomerate discount. For years, studies have shown that unrelated diversifiers trade at a discount to their break-up value. (Note that this is true in the United States, where markets are relatively efficient, and many information intermediaries exist to facilitate the flow of products, capital, and labor. According to research by Harvard Professor Tarun Khanna, unrelated diversifiers tend to perform better in developing economies, where markets are less efficient).

The explanation for the conglomerate discount is that, in the presence of efficient capital markets, investors can diversify more effectively and inexpensively than the executives of the firm. In short, we don't need senior managers at the conglomerate to spread risk by being in a wide range of unrelated businesses; we can achieve risk mitigation much more effectively by buying a portfolio of stocks of more focused firms. Similarly, in the presence of efficient external labor markets, we would question whether a conglomerate could operate its internal labor market more effectively than the external market.

However, GE has been a famous exception to the general tendency regarding the conglomerate discount. It has performed quite well for decades, with its business units outperforming most focused competitors. Could this no longer be true? If the stock price performance continues to lag the overall market, more investors will be taking a look at the age-old question: is the whole worth more than the sum of the parts? Given GE's track record, I would tend to be cautious about breaking up the firm, but it will be interesting to watch what happens if the stock continues to lag the market.

Low Risk Innovation

Business Week has an interesting article about how Pixar's John Lasseter is re-invigorating innovation and creativity at Disney's animation studios. Lasseter has come up with a relatively low risk, low cost strategy for doing so. He's funding the development of a series of five minute shorts, and he's asking young talent at the studio to direct them. The budget for a short represents less 2% of the money required to fund a major animated film. Therefore, he's deploying a relatively small amount of capital, yet providing talented up-and-comers an opportunity to try their hand at directing their first animated film. Interestingly, Walt Disney built his studio back in the 1930s based on a series of popular shorts. Now, it seems that Lasseter is returning Disney animation to its roots in hopes of rekindling the creativity that, once upon a time, made the Disney animators the envy of the entertainment world. Other firms should take notice, and they should look for their own low risk, low cost opportunities to spark innovation and creativity, while simultaneously developing and evaluating young talented employees.

Have Boards of Directors Really Changed?

In the April 2007 issue of the Academy of Management Journal, Jim Westphal and Ithai Stern published a thought-provoking study of the labor market for directors of U.S. corporations. They found that directors are more likely to be appointed to other boards if they provide advice to the CEO frequently. That is the good news. The bad news is that directors are more likely to gain new appointments to other boards if they engage in a low level of monitoring and control activity with regard to strategic decision-making by the CEO and his/her management team. After the corporate scandals of Enron, Worldcom, and others, we saw the implementation of many corporate governance reforms intended to strengthen the monitoring and control activities of boards of directors. Yet, Westphal and Stern discovered that their findings hold even in the post-Enron era. The bad news does not end there. The scholars also find that women and minorities "are punished more for engaging in monitoring and control behavior." Those findings also hold in the post-Enron era. What do I conclude from this finding? We have focused far too much effort on structural reforms at the board level, rather than focusing on board process. Board chairmen and lead directors need to develop processes that stimulate open dialogue and induce constructive debate in the boardroom. We cannot simply expect a vigorous exchange of views because we have appointed a certain percentage of outside directors. Pressures for conformity will arise, even among a highly capable group of directors who are properly nominated and selected.

Chasing the Story

In the New York Times yesterday, Hal Varian wrote about a new study conducted by three finance professors at the University of Richmond (Thomas Arnold, John Earl Jr., and David North). These scholars published a paper entitled, "Are Cover Stories Effective Contrarian Investors?" They examined how a company's stock price changed after the appearance of a cover story published in one of the leading business magazines. Arnold, Earl, and North discovered that journalists tended to write cover stories after a period of unusually good or bad performance on the part of a company - positive stories about high performing firms and negative stories about poor performers. However, after the stories are published, the companies about which positive stories were written do not perform much differently than the firms about which negative stories were published. What's the lesson for investors? Do not try to time the purchase or sale of securities based on what you read in glossy cover stories. Of course, those of us who believe that the American capital markets are relatively efficient should not be surprised by this result. The cover stories often do not constitute breaking news to the investor community. They already know much of what is being written in these pieces, and thus, the stock price has adjusted to that information prior to the publication of the magazine.

Learning vs. Performance

Harvard Professor Amy Edmondson, with whom I have co-authored several articles and case studies, has an interesting new paper about the tensions between organizational learning and performance. This paper is especially interesting because it synthesizes her outstanding work over the past decade. In this article, she argues that firms must engage in learning if they are to improve performance over time. However, efforts to enhance learning often appear at odds with an organization's performance orientation. For instance, she points out that many of her past studies have shown that learning requires a willingness to surface and discuss problems and mistakes. However, detecting and discussing errors makes organizations appear to be performing poorly. That makes managers and employees uncomfortable. Learning also creates another type of discomfort. When people learn, it typically involves a transition period, during which performance may lag as individuals and teams develop new capabilities. Therefore, Edmondson suggests that managers need to confront and assuage the discomfort that is created by a healthy learning process. If they do not, then the performance orientation of most organizations will stifle opportunities for improvement and innovation. For more on this interesting work, see http://hbswk.hbs.edu/item/5588.html

GM vs. Toyota

Big news in the auto industry this week: Toyota surpassed General Motors in global volume. Of course, we have seen this coming for some time. GM has been losing market share for decades. Fortune magazine writer Alex Taylor III has some interesting advice for GM in an article titled "Dead Brands Walking." He argues that GM has far too many brands, and that they should shut down Buick and Pontiac, sell Hummer and Saab, and convert GMC into a commercial truck brand. He advocates maintaining Chevy and Saturn as the mainstream brands and Cadillac as the high-end, premium brand. Taylor suggests that GM should note the success of Toyota and Honda, each of which does not maintain a large stable of brands. He puts forth a persuasive argument. When GM created its family of brands many decades ago, they each stood for something different in the mind of the consumer, and the brands sold cars at different price points. Over time, however, the brands came to overlap a great deal, as GM designed a new model and simply slapped superficial modifications on the basic design so as to sell the same car under several different nameplates. Why did they do this? Cost savings! Efforts to improve efficiency led to the use of common parts, and ultimately, common platforms for multiple brands. While these efforts reduced GM's costs, the consumers no longer could identify the distinct meanings of the brands. The images of each brand blurred together. In short, then, GM needs to re-think its longstanding strategy of maintaining a large brand portfolio. Interestingly, however, GM executives have been focused on two other issues for the past few years: driving down costs and improving quality. These two initiatives are surely worthwhile and necessary, but GM failed to address a much larger question: What should our strategy be? It means little to drive down costs and improve quality if one hasn't thought carefully about how to competitively position one's products in the market. If GM intends to transform itself, it ought to re-think its strategy first, and then figure out how to align the cost structure to support that strategy.

Improving MBA Education

In recent years, several prominent management scholars have penned stinging criticisms of the state of MBA education, yet far too little change has taken place in the halls of academia. Warren Bennis and James O'Toole wrote one of the best articles on this subject in 2005 in Harvard Business Review ("How Business Schools Lost Their Way"). Bennis and O'Toole criticized the fact that the academy has tilted heavily toward those who publish articles based on statistical modeling, analyses of large datasets, and laboratory experiments. While this research can be quite valuable at times, it often does not capture the complex reality of managerial work within real organizations. Far too little clinical research takes place in business schools today. Too often, scholars think of their audience as other scholars, rather than focusing on two other critical audiences for their work - students and practicing managers. I find these criticisms quite valid, and therefore, I was quite pleased to read Michael Porter's recent article in Case Research Journal. In that piece, Porter affirms the value of case research and in-depth clinical, longitudinal studies. Now, if only business schools could begin to reward the type of work that Mike Porter rightly credits with producing important insights that are relevant to the practice of management.

Developing Strategic Thinkers

What types of competencies are most difficult to develop in your employees? Human resource executives often say that they would like to develop the strategic thinking skills of key people in their businesses, but they aren't quite sure how to do so. How does a company address this developmental need? Michael Watkins has some interesting thoughts on this topic in his blog this week.

Growing Your Way to a Flawed Strategy

In 2001, Carol Loomis wrote an article for Fortune magazine, which was titled "The 15% Delusion." She described the dangers that companies encounter when their CEOs publicly proclaim aggressive growth targets. In particular, she pointed that many companies set a goal of 15% growth in earnings per share, yet few large firms can sustain this rate of growth over a lengthy period of time. She cited several studies to support this conclusion. Growing earning at 15% per year means that a firm is doubling its earnings every five years. That type of growth becomes very difficult as a company becomes quite large.

Companies continue to set such targets though, and they continue to get themselves in trouble pursuing the ever-elusive 15% growth year after year. Some executives undoubtedly will disappoint Wall Street when they fail to meet these targets. A few might cross the ethical line trying to avoid public acknowledgement of missed earnings goals. The larger problem, however, is that many firms will undermine a once quite effective competitive strategy in search of rapid growth. They often undermine their strategy by expanding their product and service offerings in an undisciplined manner. They begin trying to be all things to all people, instead of focusing intently on a particular segment of consumers. In short, many companies simply grow themselves into a troubled strategy.

In a 1996 Harvard Business Review article, Michael Porter argued that "the essence of strategy is choosing what not to do." In other words, creating a distinctive strategy is all about making good tradeoffs. Southwest Airlines, for instance, does not offer first class seating, nice meals, and assigned seats. By refusing to offer such services to customers, they have created a unique low-cost position in a very tough industry. Southwest isn't for everyone. That's ok. They don't try to cater to all flyers.

As many companies get large, and try to sustain 15%+ growth, they begin violating the tradeoffs that made them unique and great. That leads them into trouble. Porter called this the "growth trap." Do we have some examples recently? One might be The Home Depot. When Bob Nardelli took over, the company generated $45 billion in annual revenue. He spoke boldly of more than doubling revenue in five years, to achieve $100 billion in sales. That translates into roughly 15% growth per year. You see the trouble. 15% growth at a company of that size means adding more than $50 billion in revenue in 5 years - a breathtaking pace. It had taken the company more than 20 years to grow to $45 billion sales. Now, they wanted to generate that same amount of new revenue in less than 1/4 of the time. Five years later, of course, Nardelli was pushed out at The Home Depot, and many investors want new CEO Frank Blake to fundamentally re-think the strategy. Under Nardelli, the company had expanded aggressively into businesses catering to professional contractors. The firm began as a company totally focused on the do-it-yourselfer. By 2006, it had become a firm trying to cater very different kinds of customers, ranging from the buy-it-yourselfer who wanted someone else to do the work to the professional contractor who wanted to buy in bulk. Those very different customers had very different needs. It operated multiple businesses ranging from EXPO Design to Home Depot Supply. Through it all, the original "orange box" could not keep up with the same-store sales growth generated by Lowe's - a much more focused competitor.

Are there other companies today in danger because of the "15% delusion" described by Loomis? One company to watch is Starbucks. In their last Annual Report, they set out goals of achieving 20% sales growth per year and 20-25% earnings growth per year over the next 3-5 years. 25% earnings growth means doubling net income every 3 years! Can they do it? Perhaps. It has been a remarkable company. However, Starbucks is now a Fortune 500 firm. It generated nearly $8 billion in revenue last year. Sustaining such rapid growth, without undermining its distinctive competitive positioning, will be a challenge. Investors recognize this, which is why so much was made of founder Howard Schultz's recent letter to senior managers. In that letter, he warned of the possible "watering down" of the Starbucks brand and experience. He speaks, for instance, of the loss of the coffee aroma in the stores. I notice this now that Starbucks offers breakfast sandwiches... the shops don't smell like coffee any more; they smell like eggs. It's not the same experience. As Starbucks continues to try to grow aggressively, one wonders if they will violate many of the tradeoffs that made them so distinctive. What exactly will Starbucks not do these days? Are they trying to be all things to all people? Will they be more like Southwest Airlines or The Home Depot five years from now?